HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration

Takeaway: Futures activity jumped this week; 3rd quarter ADV increased but is still down -3% y/y. Cash equity volume growth accelerated to +20% y/y.

Weekly Activity Wrap Up

U.S. cash equity volume continues to widen its lead with the largest year-over-year growth among the major product categories, now running higher by +20% thus far in the new 3rd quarter. U.S. equity options activity is also putting up higher activity levels at +10% Y/Y growth. U.S. futures trading has been in a summer lull for the third quarter. However, this week's average volume picked up to 19.7 million, bringing the quarter to 17.4 million contracts daily, down -3% year-over-year but a sequential improvement versus last week's -6%. The important open interest tally continues to favor our Best Idea's long view on CME Group (CME), with the big Chicago exchange's trading backlog up now +24% since the beginning of 2014. (It was up +22% last week.)

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon1 2

 

U.S. Cash Equity Detail

U.S. cash equity trading finished the week at 7.0 billion shares traded which is blending to a 6.8 billion daily average thus far for the 3rd quarter of 2015. This is +20% year-over-year growth for U.S. stock activity. The market share battle for volume is mixed, with the New York Stock Exchange/ICE standing pat at 24% market share but with NASDAQ's still sporting market share 200 bps lower than last year, a -6% decline.

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon2

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon3

 

U.S. Options Detail

U.S. options activity remains significantly higher, both quarter-over-quarter and year-over-year. 18.4 million contracts traded this week which is blending 3Q15 activity to 17.4 million contracts per day, up +15% quarter-over-quarter and +10% year-over-year. The market share battle amongst venues continues to be one of losses at both the NYSE/ICE and NASDAQ. NYSE has lost 400 basis points of share year-over-year settling at just 18% of options trading currently. NASDAQ also has shed 400 basis points of share, good for a -14% loss from last year as ISE/Deutsche Boerse and BATS mop up volume and share.

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon4

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon5

 

U.S. Futures Detail

CME Group volume picked up this week to 15.0 million contracts. That blends 3Q15 volume to a 13.1 million average level, a -3% year-over-year decline. CME open interest, the most important beacon of forward activity, continues in strong fashion with 104.8 million contracts pending, good for +24% growth over the 84.1 million pending at the beginning of 2014. That marks further improvement from the prior week's +22%.

 

Activity levels on the futures side at ICE hit 4.8 million contracts this week, with 3Q15 blending to a 4.3 million daily average. That is also a -5% year-over-year decline. ICE open interest this week tallied 73.3 million contracts, a -3% contraction versus the 75.2 million contracts open at the beginning of 2014. That marks an improvement versus the prior week's -4% level.

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon6

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon8 2

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon7

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon9 2

 

Monthly Historical View

Monthly activity levels give a broader perspective of exchange based trends. As volatility levels, measured by the VIX, MOVE, and FX Vol should rise to normal levels after the drastic compression this cycle, we expect all marketplaces to experience higher activity levels.

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon10

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon11

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon12

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon13

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon14

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon15

 

Sector Revenue Exposure

The exchange sector has broadly diversified its revenue exposure over 10 years as public entities with varying top line sensitivity to the enclosed trading volume data. The table below highlights how trading volumes will flow through the various operating models at NASDAQ, CME Group, ICE, and Virtu:

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon19 3

 

 

 

 We recently presented our investment thesis on the Exchanges. To summarize,

  • Long CME:  Financially oriented CME Group (CME) is enjoying a long awaited boom in activity, as trader counts and open interest in Treasuries, Eurodollars, and FX products are swelling. The decade long concentration on trading energy and commodities is over and with steeply shaped forward curves and more profitable opportunities, financial products are seeing rapid adoption. 
  • Short ICE: We see collateral damage from the ongoing rapid price decline in energy and commodity markets. As a result, these important products at ICE will be less active than the Street expects, as commercial hedging and speculative energy trading dries up.

We think CME has $5 per share in earnings power in the out year and the stock will revisit near $140. As outlined in our presentation deck and replay below, a CME long position can also be paired with a short ICE position, with favorable fundamental exposures on each side of the trade.

 

Separately, recent IPO Virtu (VIRT) is being valued incorrectly by the market. Our main qualm is that the company takes intraday prop risk, but has no tangible equity capital to cover any potential trading losses. Shares of VIRT are currently on our Best Ideas list as a short with a fair value in the mid-teens (30-40% downside).

 

Hedgeye Exchange Black Book Replay HERE

Hedgeye Exchanges Black Book Materials HERE

 

HEDGEYE Exchange Tracker | Futures Jump, Cash Equities Continue Acceleration - XMon20

 

 Please let us know of any questions,

 

Jonathan Casteleyn, CFA, CMT 

  

  

 

 Joshua Steiner, CFA

 

 

 

 


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more